Chapter 2: Foreign Investment Proposals 15
Chapter 2
Foreign investment
proposals
Chapter 2: Foreign Investment Proposals 15
Chapter 2: Foreign investment proposals
Foreign investment proposals
This chapter provides an overview of, and statistical information on, applications considered in 200809.
Features of the FIRB statistics
While this chapter provides a useful source of data on foreign direct investment in Australia, the Board urges particular caution in the use of these statistics, including when making comparisons with earlier years as policy, data capture and reporting methodologies change over time. There are also substantial differences between the FIRB statistics and actual investment flows. The latter developments are more reliably captured by Australian Bureau of Statistics (ABS) data, which seeks to reflect more comprehensively investment transactions between residents of Australia and nonresidents.
The statistics contained in this chapter do not measure total foreign investment made in any year, nor do they measure changes in net foreign ownership levels in Australia. Rather, they provide information on proposed investments that fall within the scope of the Foreign Acquisitions and Takeovers Act1975 (the FATA) and the Government’s foreign investment policy (the policy). The monetary value attributed to an approved proposal is the amount advised by the applicants. It represents an estimate of the expected investment in that year and subsequent years that would result if the proposal is in fact implemented. The statistics therefore provide partial coverage of all foreign investments made and may include some transactions that do not actually proceed. Several points should be noted:
• The data does not cover foreign investments below the various monetary and percentage thresholds that apply under the FATA and the policy. Nor does the data cover followon investments to expand the capital stock of existing foreignowned businesses (both in existing areas and into related areas). See the FIRB website, www.firb.gov.au, for the current thresholds.
• The figures are based on the assumption that investment funds will be sourced from overseas. The extent to which approved investment proposals will actually be funded externally and therefore result in foreign capital inflows depends not only upon whether they are implemented, but also upon the proportion that is financed from foreign sources. Some (and in some cases all) of the proposed funds to be invested may be contributed by Australians, for example, where they are in partnership with foreign interests or where the investment is financed from existing Australian operations.
• The source of funds identified in the Board’s statistics does not necessarily imply the country of control. For example, if a company has a single substantial shareholder, the country of that shareholder is recorded, or if a company’s shares are widely held, the country of domicile/incorporation is recorded.
• The data does not necessarily reflect a change in foreign ownership as, in some cases, both the target and the purchaser are defined as a foreign person under the FATA.
• Acquisitions of diversified company groups are classified into a single industry sector according to the major activity of the group, for example, in a diversified mining company with interests in various minerals. Acquisitions of real estate to be used for purposes incidental to the main business activity of the purchaser are classified according to that activity.[3]
The Board’s statistics are also not a reliable indicator of foreign investment inflows because:
• they include proposals that are approved in a given year but which are not actually implemented, or could be implemented in a later year, or over a number of years;
• they include approvals for multiple potential acquirers of the same target company or asset;
• they are inherently irregular and can be skewed due to very large investment proposals;
• major liberalisations of the policy that have occurred since the mid1980s have acted to reduce the number of proposals and thus limit comparability over time, such as:
– the increase in the general asset threshold in 1999 from $5 million to $50 million, and again in December 2006 from $50 million to $100 million;
– the increase in the offshore takeovers threshold in December 2006 from the general asset threshold (then at $50 million) to $200 million;
– the introduction of thresholds for the calendar year 2005 of $800 million and $50million (indexed annually) for United States investors from 1January2005; and
– the introduction of changes in 2009 to the screening arrangements for residential real estate whereby persons who are temporary residents are not required to seek FIRB approval for certain residential real estate acquisitions (see the FIRB website www.firb.gov.au for more information);
• changes to other government policies and legislation may have an effect on proposed foreign investment, such as:
– the removal of foreign ownership restrictions in the media sector in April 2007; and
– changes in immigration policies that control the number of temporary resident visa holders which largely determines the level of foreign investment in developed residential real estate;
• the implementation of a new case management system (known as FIMS) in December 2005 significantly improved data collection accuracy. FIMS allows a more detailed analysis of proposed foreign investment, as reflected in improvements to the statistics presented from the 200506 Annual Report onwards. While the data in that report and subsequent reports is consequently more accurate, caution is necessary in making interyear comparisons involving data from earlier years;
• reporting procedures for proposals involving financing arrangements were amended in 200506. Although they continue to be included in the statistics (in the number of approvals), the proposed acquisition cost and development expenditure are not recorded in FIMS for proposals such as lending arrangements where there is not expected to be an equity investment flow into Australia.[4] This has affected the value attributed to proposed investment in the finance and insurance industry; and
• prior to 200506, proposals involving share acquisitions were recorded as conditionally approved on the basis that the proposed acquisition was to proceed within 12 months. In FIMS, such proposals are no longer recorded as conditionally approved.[5]
• Changes to the real estate screening arrangements introduced in 200809 have affected the proportion of approvals that are subject to conditions (58 per cent of total approvals in 200809 compared with 79 per cent under the previous system in 200708). However, the value of proposed investment reported as being associated with the conditional approval category has significantly increased due to the very large investment amounts involved with such proposals.
The term ‘proposed investment’ is used widely throughout this report. Proposed investment is the aggregation of the following estimates:
• acquisition costs (including shares, real estate or other assets);
• development costs following the acquisition; and
• costs of both establishment and development in the case of new businesses.
Applications considered
This section analyses all investment proposals that were finalised (approved, rejected, withdrawn or exempt) during 200809, irrespective of the date they were submitted.[6] Corporate reorganisations are included here (75 in 200809), whereas they are excluded from the analysis of approved investment provided later in this chapter.[7]
The number of applications considered during 200809 was 5,821, which is 32 per cent lower than the 8,548 in 200708. Table 2.1 provides a breakdown of the number of applications considered over the last six years, according to the outcome of proposals.
Of the 5,352 applications approved in 200809 (32 per cent lower than the 7,841approvals in 200708), 3,086 were approved subject to conditions and 2,266 without conditions being imposed. All but five of the conditional approvals were in the real estate sector. Real estate conditions ordinarily imposed at that time include those relating to the period during which development must commence (increased from 12 months to 24 months from December2008), requiring temporary residents to reside in and then sell established dwellings when they cease to reside in them, and reporting requirements.
A total of three proposals were rejected in 200809 (14 in 200708), representing less than 0.1 per cent of all proposals considered. All of these rejected proposals were related to real estate acquisitions.
In 200809, 341 proposals were withdrawn by the applicants, representing a 35 per cent decrease on the 521 withdrawals in 200708 and representing about the average level over recent years of around 6per cent of the total applications received. In 200809, 86per cent of withdrawals involved real estate proposals. Many of these withdrawals resulted from applicants submitting several concurrent or a series of applications (often for properties that were to be auctioned and for which they intended to bid), and once one property had been purchased, subsequently withdrawing the remaining applications. In other cases, proposals were withdrawn because the investment was deferred or the applicant decided not to proceed for commercial reasons.
Foreign investors are encouraged to discuss all types of proposals with the Board’s secretariat to ensure they are consistent with the policy. Where it is important to maintain commercial confidentiality, applicants may decide to withdraw and later resubmit complex proposals that require more than the standard 30day examination period set by the FATA in preference to the issuing of an Interim Order, because such Orders are published in the Commonwealth of Australia Gazette and therefore reveal publicly the existence of the proposals.
During 200809, 125 proposals were determined to be exempt compared with 172 in 200708. Some applications received were determined to be outside the scope of the policy or the scope of the FATA, because they were exempted by the Foreign Acquisitions and Takeovers Regulations1989. The existence of these particular applications reflects in part the requirement under the policy that foreign investors submit proposals if they have any doubt as to whether the proposals are notifiable.
Table 2.1: Applications considered: 200304 to 200809
(number of proposals)
Note: Figures include corporate reorganisations (75 in 200809).
Applications decided
This section analyses all proposals that were approved (either with or without conditions), or rejected during 200809, irrespective of the date they were submitted. Corporate reorganisations are included.
The number of applications decided during 200809 was 5,355 which was 32 per cent fewer than in 200708, and which reversed the increasing trend in applications decided in recent years (see Table 2.1). The value of decided applications was $181.4 billion in 2008-09, or 6 per cent lower than in 200708. Table 2.2 provides a breakdown of proposed investment according to the outcome of decided applications for the corresponding period provided in Table 2.1.
Table 2.2: Applications decided: 200304 to 200809
(proposed investment)
Note: Totals may not add due to rounding.
‘0.0’ indicates a figure of less than $50 million.
Including corporate reorganisations (75 in 200809).
Charts 2.1 and 2.2 display the figures from Tables 2.1 and 2.2 to show the difference between applications decided within the real estate and nonreal estate sectors[8] (other sectors) by number of proposals and value of proposed investment.
Chart 2.1 shows that, by number, most of the applications decided were within the real estate sector. Chart 2.2 shows that, by value, most of the proposed investment occurred in nonreal estate sectors.
Charts 2.1 shows the decrease in the number of applications decided in the real estate sector in 2008-09. Chart 2.2 shows that the estimated proposed investment in the real estate sector declined in 200809 but the estimated proposed investment in the nonreal estate sectors continued to increase. As noted previously, the decline in real estate cases in 200809 largely reflected changes to the screening arrangements for residential real estate announced on 18 December 2008. Further discussion of developments in the real estate sector is provided on pages 2836.
Chart 2.1: Applications decided 200304 to 200809 —
number of proposals
Chart 2.2: Applications decided 200304 to 200809 —
proposed investment
Approvals by value
This section analyses applications approved during 200809 (excluding corporate reorganisations). Table 2.3 displays approvals by the value of proposed investment for 200506 to 200809. There was a decrease in 200809, compared with 200708, across all categories except those proposals where the value exceeded $5 billion. Overall, there were 32 per cent fewer approvals with a 5 per cent decrease in proposed investment compared with 200708.
Table 2.3: Total approvals by value and number 200506 to 200809
Note: Totals may not add due to rounding.
Excludes corporate reorganisations (75 in 200809).
Charts 2.3 and 2.4 depict total approvals by value and number using the data provided in Table 2.3. The decrease in the number of approvals involving proposed investment of less than $1million can be seen in Chart 2.3, correlating with the decrease in real estate proposals shown in Chart 2.1.
Chart 2.3: Total approvals by value 200506 to 200809 —
number of proposals
Chart 2.4: Total approvals by value 200506 to 200809 —
proposed investment
Approvals by sector
Table 2.4 lists applications approved in 200809 by industry sector. Chart 2.5 depicts the sectoral distribution of approved proposed investment in 200809. Corporate reorganisations are excluded. Most of the proposed investment is attributable to acquisition cost. The skewing of the foreign investment data towards acquisition costs reflects the fact that the FATA applies to acquisitions of interests in, and not to the expansion of, existing businesses. The real estate sector’s development figures predominantly reflect the estimated expenditure on construction on vacant land. Bearing in mind the limitations of the Board’s data, the figures show that, during 200809:
• mineral exploration and development was the largest industry sector by value of approvals, with approvals totalling $90.6 billion ($64.3 billion in 200708); and
• other significant sectors by value of proposed investment were: services with $31.7billion ($35.7 billion in 200708), real estate with $23.4billion ($45.5 billion in 200708), and manufacturing with $19.1 billion ($31.3 billion in 200708).